Payday loans may outstrip credit cards – PwC

Payday lenders could overtake credit cards and become a mainstream method of borrowing, a report by one of the UK’s leading accountancy firms has warned.

PricewaterhouseCoopers (PwC) said that consumers unable to borrow from traditional lenders, including credit card companies, were seeking alternatives such as so-called payday loans.

But while these short-term, high-cost loans have previously been associated with higher risk borrowers on low incomes, the convenience and innovation offered by payday lenders are attracting a broader and more prosperous selection of consumers, at the expense of traditional bank loans.

In its report, Precious Plastic 2012, Simon Westcott, director at PwC, said: “Mainstream lenders need to be aware that what may have begun as a last resort could be an enduring relationship, as consumers are pleasantly surprised at the convenient and innovative service they receive from these smaller, more agile providers.

“As these providers become more conventional, we are likely to see them venture further into the mainstream market with their own credit card, longer term loan products or even current accounts.”

Payday lenders have attracted considerable bad publicity for their high interest rates and tendency to allow loans to roll over, resulting in huge charges for those who can’t afford to repay their debts within the original time frame. Labour MP Stella Creasy is campaigning for the government to introduce a total cost cap on short-term loans to protect vulnerable borrowers.

But Wescott argues that the limited length and size of payday loans appeals to consumers who are increasingly nervous about borrowing in an uncertain economic climate. “Our credit confidence survey has shown that there is a growing reluctance to borrow in the future and a marked deterioration in confidence about meeting repayments – particularly among 18- to 24-year-old consumers where less than half of those surveyed believe they will be able to repay their debts,” he said.

The firm, which surveyed 2,000 adults, found that levels of unsecured borrowing had fallen for the third year in succession by more than £355 per household in 2011, but worrying signs remained about their ability to continue paying off their debts, particularly in the 25- to 34-year-old age group, where 25% admitted to needing to use credit to fund essential purchases.

Westcott said: “UK consumers are among the most indebted in the world, with the average UK household still saddled with nearly £8,000 of unsecured debt.”

However, credit cards were suffering a “mid-life crisis”, with consumers discarding nearly 1m cards in 2011, and credit card borrowing reducing at a faster rate than other types of unsecured lending. Total outstanding credit card debt dropped by 5% in 2011, leaving the average credit card balance at about £1,000.

In contrast, the use of debit cards has grown by 10% in 2011 and they are now used more than cash payments for the first time.

Wescott said: “As the credit card model comes under pressure, there may be a return to annual fees as regulators push for more transparent ways of charging. Other banking products are likely to go the same way as consumers and regulators look for simpler products, and the free bank account may become a thing of the past.”

PwC audits the accounts of Wonga, but none of the firm’s auditors were involved in drawing up the report.